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China foreign exchange reserves in record fall

chinaSHANGHAI/BEIJING--China's foreign exchange reserves posted their biggest monthly fall on record in August, reflecting Beijing's attempts to halt a slide in the yuan and stabilise financial markets following its surprise move to devalue the currency last month.
  China's reserves, the world's largest, fell by $93.9 billion last month to $3.557 trillion, central bank data showed on Monday. The drop left market watchers questioning how sustainable China's efforts to support the yuan are, as capital flows out of the country due to fears of an economic slowdown and prospects of rising U.S. interest rates.
  "Frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity," said Zhou Hao, senior economist at Commerzbank in Singapore.
  The offshore yuan weakened following the data release to trade at a record discount to the onshore rate, suggesting investors believe the official rate is being kept too high. There was relief, though, that the dip in reserves had not been larger, with some commentators predicting in the run-up to the announcement that the drop could be as much as $200 billion.
  The decline in reserves has quickened following China's near 2 percent devaluation of the yuan on Aug. 11, which stoked fresh concerns about the economy and heavy selling of the currency. China was so surprised by the reaction to the devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off fears of a global currency war, policy insiders have told Reuters.
  Chinese policymakers are now determined to show their financial markets are back to normal, after the devaluation of the yuan, or renminbi, coupled with wild swings in its stock markets caused jitters in markets around the world. China's Central Bank Governor Zhou Xiaochuan told financial leaders from the world's 20 biggest economies over the weekend that Chinese financial markets had almost completed their correction after a steep run up in stock prices in the first half of the year.
  Zhou's comments, coupled with pledges from regulators to deepen financial market reforms, had limited impact in stabilising China's stock markets on Monday, which closed before the release of the reserves data. The CSI300 index of the biggest stocks in Shanghai and Shenzhen closed down 3.4 percent, while the Shanghai Composite Index was 2.5 percent lower, in the first day of trading following a four-day long weekend.
  Chinese equity markets have fallen 40 percent since mid-June, despite the authorities unleashing a volley of policy responses to try and stem the falls. On Monday, China unveiled changes to taxes on share dividends aimed at encouraging longer term investment as opposed to short-term speculation. The measures are due to come into effect on Tuesday.
  Hours earlier, the Shanghai stock exchange said the Shanghai and Shenzhen Stock Exchanges and the China Financial Futures Exchange planned to introduce a "circuit breaker" on the CSI300 index to stabilise the market. The exchanges are seeking comment from market participants before Sept. 21 on proposals to suspend trade in the country's equity indexes if it moves sharply either way. There is no guarantee that Beijing will adopt the proposals.
  However, while seeking to reduce volatility in equities, if enacted, they could prove a disincentive to short-term investors by restricting the market's potential to rise as well as fall. Initial reaction among economists was sceptical.
  "What's the point? It merely delays the pace of the market fall," said Liu Ligang, China economist at ANZ in Hong Kong.
  Last week the China-based investment community was put on edge following media reports that the China chairwoman of Man Group Plc, Li Yifei, had been taken into custody to help with a police probe into stock market volatility. However, Li told Reuters on Monday that the reports were incorrect, saying she spent last week in industry meetings and then took a 5-6 day trip to meditate.
  China's government is also pushing on with attempts to ease concerns about the country's slowing economic growth. Finance Minister Lou Jiwei was quoted in a central bank statement as saying that central government spending would rise by 10 percent this year, up from the 7 percent growth budgeted at the start of 2015.

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